In re Books-A-Million, Inc. S'holders Litig., Consol. C.A. No. 11343 (Del. Ch. Oct. 10, 2016) (Laster. V.C.)
In this memorandum opinion, the Court of Chancery, applying the framework approved by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), dismissed claims for breach of fiduciary duty in connection with a merger. Specifically, the Court held that because stockholder plaintiffs’ complaint did not support a reasonably conceivable inference that the M&F Worldwide conditions were not met, the business judgment rule applied.
Minority stockholders (“Plaintiffs”) of Books-A-Million, Inc. (the “Company”) challenged a squeeze out merger (the “Merger”) in which the controlling stockholder acquired all outstanding shares of the Company’s stock. Plaintiffs alleged that the Company’s directors and the controlling stockholder breached their fiduciary duties in approving the Merger.
In April 2012, the controlling stockholder proposed acquiring the outstanding Company shares for $3.05 per share. The board formed a special committee of independent directors to evaluate the proposal. The special committee rejected the offer as undervaluing the Company. Following further negotiations, the controlling stockholder withdrew the proposal. Nearly three years later, in January 2015, the controlling stockholder proposed acquiring the outstanding Company shares for $2.75 per share (the “Proposal”). The Proposal stated the controlling stockholder expected the Company’s board to establish a special committee of independent directors with its own financial and legal advisors, and that the controlling stockholder “will not move forward with the transaction unless it is approved by the Special Committee.” Further, the Proposal stated that “any definitive acquisition agreement would need to include a non-waivable majority of the minority vote condition.”
The board appointed a special committee of independent directors. The special committee retained separate legal and financial advisors, and solicited offers for the Company from third parties. During negotiations the special committee rejected the controlling stockholders’ initial offer, and engaged in discussions with a third party. Ultimately the board unanimously approved the Merger at $3.25 per share.
Plaintiffs filed suit alleging breach of fiduciary duty. Plaintiffs argued that the Proposal did not meet the first element of the M&F Worldwide framework, requiring controllers to condition transactions ab inito upon (1) approval of an independent special committee; and (2) a vote of the majority of the minority stockholders. Plaintiffs argued that the Proposal was a continuation of the controlling stockholder’s prior 2012 offer that failed to meet these elements. The Court rejected this argument. The Court noted that there was a three-year time period between the offers, and that each offer had different prices and different terms and generated separate processes. The Court also noted that the Proposal used substantially identical language to the offer in M&F Worldwide.
Thus, because the controlling stockholder and the board followed the M&F Worldwide framework, and Plaintiffs failed to show bad faith or gross negligence by the board, the Court applied the business judgment rule. The Court found the only possible inference was that the Merger was fair to the minority, and the action was dismissed with prejudice.